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The Bane Of Crypto Custodial Services Is Regulation

Crypto has come a long way from its humble beginnings when very few people were enthusiastic about the future of the technology. Now, everyone wants to get a piece of the action as it is becoming evident that crypto might just be the currency of the future.

It is this factor that has initiated an increase in interest from intuitional investors and financial powerhouses in recent years, especially in 2018. However, the unavailability of regulated crypto custodial facilities has indirectly hindered their foray into the crypto market. Apart from a few countries that have specifically introduced regulations on crypto custodial services, there are still a lot of controversies surrounding custodial regulations in many regions.

The Regulatory Debacle In Major Regions

Before 2018, custodial solution was a new subject in the crypto space and only a few companies were willing to take on the risks associated with storing digital assets. Indeed, the explosion of crypto custody services in the latter part of 2018 was an unprecedented feat that takes crypto a step closer to mainstream adoption.

However, many of these custodial services have not fully kicked off operations because regulations in their regions are yet to fully encompass crypto as an asset. The US, in particular, is a country with both state and federal regulators who often work in independent of each other. Apparently, SEC requires that institutional investors that hold their clients’ asset that is worth more than $150,000 should store the assets with a qualified custodian.

In essence, the custodian in this contest must have the right license and comply with regulations that govern custodial services in that region. Therefore, getting a license at the state level might not make a service a “qualified’ custodian.

This is true for Coinbase which in November got a license from the New York State Department of Financial Services (NYDFS) to provide custodial services for six cryptocurrencies. Nonetheless, we are yet to fully grasp the importance of this development since other regulators in the US could have other conditions that Coinbase is yet to conform with.

Also, BitGo announced that the South Dakota Division of Banking has recognized BitGo Trust Company as a “Public South Dakota Trust Company”. Yet, this also does not in a way prove that BitGo is fully compliant with SEC’s requirements. According to the Chief c0ompliance officer at BitGo, Shahla Ali,

“Although we can’t say that the South Dakota Trust Company meets the full requirements of the SEC for custody of traditional assets, we do believe that receiving the South Dakota Trust charter allows us to become the first, digital-asset custodian that is actually tailored for crypto assets. South Dakota is also the most prolific in terms of trust companies charters utilized by companies like Citibank, Wells Fargo and other large organizations that choose to do their trust charters in South Dakota. We wanted that oversight, hence BitGo’s choice of South Dakota as a regulator.”

To further complicate matters, SEC at one point came out to declare that it does not recognize Bitcoin and Ethereum as funds and securities. Therefore, it is not yet clear if these two digital assets are included in the class of assets that institutional investors are mandated to store with a qualified custodian.

Away from the uncertainties that have engulfed crypto regulation in the US, the UK also does not have clearly stated rules on the crypto custody services. Regulators in the country have continually modified regulations on digital assets as the Treasury Committee’s recommendation on crypto assets and the latest EU Anti-Money Laundry Directive are key regulations that govern crypto assets in this region.

Unfortunately, a majority of traditional custodians and big players in this industry are located in regions that yet to fully define the requirements for crypto custodial solutions. As a result, these powerhouses are still by the sidelines waiting on clear directives that would serve as a green light on their proposed crypto-related plans.

The inability of regulators in these regions to forge crypto-specific regulations will continue to stifle the explosive growth in the crypto space as custodial services promise to put to rest issues surrounding the security of cryptocurrencies. Nonetheless, positive developments in other regions in recent months indicate that it is just a matter of time before crypto custody services take center stage.

Regions With Crypto-Specific Regulations

Forward-thinking countries like Malta have gone to lengths to draft and pass a regulatory framework for crypto. Also, Mauritius has outlined the requirements for crypto custodial solutions within its borders with the African island nation highlighting the need for a secure cold storage as an essential requirement. Bermuda joined the bandwagon in late December by releasing a draft that outlined the regulations for crypto custodial services.

Also, the introduction of new regulations in Hong Kong has led to the emergence of the first licensed crypto custodial solution in the country. These developments indicate that we are going to witness more crypto-specific regulatory frameworks in 2019 that would shed more light on the foggy nature of crypto custodial service in major regions.

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